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by EOS Intelligence EOS Intelligence No Comments

Ethiopia’s Half-Hearted Push to Telecom Privatization Finds Limited Success

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Ethiopia’s telecom sector has been considered as the last frontier for telecom players, since the country is one of just a few to still have a state-run telecom industry. However, this is due to change, as the Ethiopian government has finally opened up the sector to private investment. Privatization of the telecom sector has been on the prime minister Abiy Ahmed’s agenda since he first took office in 2018, however, it was initially a slow process, mostly due to bureaucracy, ongoing military conflicts, and COVID-19 outburst. Apart from that, the privatization terms have not been very attractive for private players, making the whole process complicated.

With a population of about 116 million and only about 45 million telecom subscribers, Ethiopia has been one of the most eyed markets by telecom players globally. The telecom sector has immense potential as Ethiopia has one of the lowest mobile penetration rates in Africa.

To put this in perspective, Ethiopia has a mobile connection rate of only 38.5%, while Sub-Saharan Africa has a mobile connection rate of 77%. Moreover, 20% of Ethiopian users have access to the Internet and only about 6% currently use social media, which is much lower than that in other African countries. That being said, about 69% of the country’s population is below the age of 29, making it a strong potential market for the use of mobile Internet and social media in the future.

This makes the market extremely attractive for international players, who have for long been kept at bay by the Ethiopian government. Thus, when the government expressed plans to open up the sector, several leading telecom players such as MTN, Orange, Etisalat, Axian, Saudi Telecom Company, Telkom, Vodafone, and Safaricom showed interest in penetrating this untapped and underserved market.

Currently, state-owned Ethio Telecom, is the only player in the market. Lack of competition has resulted in subpar service levels, poor network infrastructure, and limited service offerings. For instance, mobile money services, which are extremely popular and common across Africa have only been introduced in Ethiopia in May 2021.

Moreover, as per UN International Telecommunication Union’s 2017 ICT Development Index (IDI), Ethiopia’s telecom service ranked 170 out of 176 countries. To correct this, in June 2019, the government introduced a legislation to allow privatization and infuse some competition and foreign investment into the sector. The privatization process is expected to rack up the country’s foreign exchange reserves, in addition to facilitating payment of state debt. It also aims to improve the overall telecom service levels and help create employment in the sector.

As a part of its privatization drive, the government has proposed offering two new telecom licenses to international players as well as partially privatizing Ethio Telecom by selling a 40% stake in the company. The sale of the two new licenses will be managed by the International Finance Corporation, which is the private sector arm of the World Bank.

Ethiopia’s Half-Hearted Push to Telecom Privatization Finds Limited Success by EOS Intelligence

While this garnered interest from several international telecom players, with 12 bidders offering ‘expression of interest’ in May 2020, the process has not been very smooth, owing to bureaucracy, ongoing military conflicts in the north of the country, and the proposal of an uneven playing field for international players versus Ethio Telecom. This last challenge appears to be a major obstacle to a smooth privatization process.

As per the government’s initial rulings, the new international players were not to be allowed to provide financial mobile services to their customers, while this service was only to be reserved for Ethio Telecom. Mobile money is a big part of the telecom industry, especially in Africa, where it is extremely popular and profitable as banking infrastructure is weak. This made the deal much less attractive for foreign bidders as mobile money constitutes a huge revenue stream for telecom players in African markets.

However, post the bidding process in May 2021, the government has tweaked the ruling to allow foreign players to offer mobile money services in Africa after completing a minimum of one year of operations in the country. However, since this ruling came in after the bidding process was completed, the government missed out on several bids as well as witnessed lower bids, since companies were under the impression that they will not be allowed to offer mobile money services. As per government estimates, they lost about US$500 million on telecom licenses because of initial ban on mobile money.

Another deterrent to the entire process has been the government’s refusal to allow foreign telecom tower companies to enter the Ethiopian market. The licensed telecom companies would either have to lease the towers from Ethio Telecom or build them themselves, but they would not be allowed to get third party telecom infrastructure players to build new infrastructure for them, as is the norm in other African countries. This greatly handicaps the telecom players who will have to completely depend on the state player to provide infrastructure, who in turn may charge high interconnection charges that may further create an uneven playing field.

These two regulations are expected to insulate Ethio Telecom from facing fierce competition from the potential new players, and in turn may result in incumbency and poor service levels to continue. Moreover, even with regards to Ethio Telecom, the government only plans to sell 40% stake to a private player (while 5% will be sold to public), thereby still maintaining the controlling stake. With minority stake, private players may not be able to work according to their will and make transformative changes to the company. It is considered a way to just get fresh capital infused into the company without the government losing real control of it.

In addition to these limitations, the overall process of privatization has faced delays and complications. The bidding process has been delayed several times over the past year owing to regulatory complexities, the COVID crisis, and ongoing military conflict in the northern region. The process, which was supposed to be completed in 2020 was completed in May 2021, with the final bidding process taking place in April 2021 and the government awarding the bids in May 2021.

During the bidding process, the government received only two technical bids out of the initial 12 companies that had shown interest. These were from MTN and a consortium called ‘Global Partnership for Ethiopia’ comprising Vodafone, Safaricom, and Vodacom. While the Vodafone consortium partnered with CDC Group, a UK-based sovereign wealth fund, and Japanese conglomerate, Sumitomo Corporation, for financing, MTN group teamed up with Silk Road Fund, China’s state-owned investment fund to finance their expansion plans into Ethiopia. The other companies that had initially shown interest backed out of the process. These include Etisalat, Axian, Orange, Saudi Telecom Company, Telkom SA, Liquid Telecom, Snail Mobile, Kandu Global Communications, and Electromecha International Projects.

In late May 2021, the government awarded one of the licenses to the ‘Global Partnership for Ethiopia’ (Vodafone, Safaricom, and Vodacom) consortium for a bid of US$850 million. While it had two licenses to give out, it chose not to award the other license to MTN, who had made a bid of US$600 million. As per government officials, the latter bid was much lower than the expected price, which was anticipated to be close to a billion by the government.

Moreover, the government seems to have withheld one of the licenses as currently the interest in the deal has been low, considering that it only received two bids for two licenses. Given that they have somewhat altered and relaxed the guidelines on mobile money (from not being allowed to be allowed after minimum one year of operations), there may be some renewed interest from other players in the market. That being said, the restriction on construction of telecom infrastructure is expected to stay as is.

In the meanwhile, Orange, instead of bidding for the new licenses, has shown interest in purchasing the 40% stake in Ethio Telecom, which will give the company access to mobile money services right away. However, no formal statement or bid has been made by either of the parties yet. If the deal goes through, it will give Orange a definite advantage over its international competitors, who would have to wait for minimum one year to launch mobile money services in the market. In May 2021, Ethio Telecom launched its first mobile money service, called Telebirr, and managed to get 1 million subscribers for the service within a two-week span. This brings forth the potential mobile money holds in a market such as Ethiopia.

EOS Perspective

While several international telecom companies had initially shown interest in entering the coveted Ethiopian market, most of them have fizzled out over the course of the previous year, with the government only receiving two bids. Moreover, the bid amounts have been much lower than what the government initially anticipated and the government chose to accept only one bid and reject the other. Thus the privatization process can be deemed as only being partially successful. Furthermore, the opportunity cost of restricting mobile money services has been about US$500 million for the government, which is more than 50% of the amount they have received from the one successful auction.

This has occurred because the government has been focusing on sheltering Ethio Telecom from stiff competition by adding the restrictions on mobile money and telecom infrastructure. While this may help Ethio Telecom in the short run, it is detrimental for the overall sector and the privatization efforts.

Restrictions on using third-party infrastructure partners, may also result in a slowdown in rolling out of additional infrastructure, which is much needed especially in rural regions of Ethiopia. Other issues such as ongoing political instability in the northern region have further cast doubt in the minds of investors and foreign players regarding the government’s stability and in turn has impacted the number of bids and bid value.

It is expected that the government will restart the bidding process for the remaining one license soon. However, the success of it depends on the government’s flexibility towards mobile money services. While it has already eased its stance a little, there is still a lot of ambiguity regarding the exact timelines and conditions for the approval. The government must shed clarity on this before re-initiating the bidding process. MTN has also mentioned that it may bid again if mobile money services are included in the bid.

However, with Vodafone-Safaricom-Vodacom consortium already winning one bid and expecting to start services in Ethiopia as early as next year, the company definitely has an edge over its other competitors. Considering that the first bid took more than a year and faced several bureaucratic delays, it is safe to say that the second bid will not happen any time soon, especially since this time it is expected that the government will give a serious thought to the inclusions/exclusions of the deal and the value that mobile money brings to the table for both the government and the bidding company.

by EOS Intelligence EOS Intelligence No Comments

COVID-19 Outbreak Boosts the Use of Telehealth Services

Telehealth is one of the few sectors that have benefited from the coronavirus outbreak. Telehealth services have been around since 1950s, however, they were perceived as a nice-to-have alternative to conventional delivery of healthcare services and thus largely underutilized. COVID-19 pandemic has proved to be a game changer for the industry. Since social distancing became a necessary measure to curb the risk of COVID-19 transmission, telehealth emerged as a viable option to offer uninterrupted healthcare without physical contact. Towards the end of 2020, Deloitte predicted that virtual consultations would account for 5% of total visits to doctor in the world in 2021, up from 1% in 2019. To put this into perspective, in 2019, doctor’s visits in OECD-36 countries totaled 8.5 billion, worth approximately US$500 billion. 5% of this would result in about 400 million teleconsultations and over US$25 billion in value (if doctors earn the same for teleconsultations as for in-person visits).

Telehealth services uptake during the pandemic varied by region

While the adoption of telehealth services has increased across the globe, the growth rate varied by region depending upon factors such as technology and infrastructure, consumer awareness and willingness, government regulations, insurance policies, etc.

In the USA, world’s largest telehealth market which accounted for 40% of the global share in 2019, the growth over the years was steady but incremental mainly because of regulatory constraints and stringent insurance policies.

In response to the pandemic, the US government health insurance plans (Medicare, Medicaid, etc.) as well as private insurers expanded their coverage for telehealth services. As a result, telehealth accounted for 43.5% of all US Medicare primary care visits in April 2020, compared with just 0.1% before the pandemic. US Centers for Disease Control and Prevention indicated that the number of telehealth visits increased by 154% during the last week of March 2020, compared with the same period in 2019, primarily due to policy changes and public health guidance on telehealth during the pandemic. Considering unprecedented rise in demand for telehealth services during the times of pandemic, in April 2020, Forrester (a research and consulting firm) revised their estimation for virtual general medical care visits in the USA from 36 million to 200 million for the year 2020.

UK and France have been the dominating countries in the European telehealth market. Telehealth services’ growth momentum due to COVID-19 pandemic in these countries is likely to continue because of conducive environmental factors such as established ecosystem, favorable regulatory framework, reimbursement policies, and consumer readiness. UK’s National Health Service revealed that 48% of GP consultations in May 2020 were carried out remotely over the telephone, compared with 14% in February of the same year. Teleconsultations in France increased from 40,000 in February 2020 to 611,000 in March 2020.

Growth of telehealth market in Switzerland, Germany, and Austria has been comparatively slow as these countries have more decentralized healthcare systems in contrast to UK or France. For instance, McKinsey’s survey of over 1,000 consumers from Germany, conducted in November 2020, showed that only 2% respondents started or increased usage of telehealth services since COVID-19 outbreak.

In countries such as Greece and Czech Republic, telehealth platforms were launched for the first time during the pandemic. Ireland had telehealth platforms before COVID-19, but the adoption of the telehealth services even after pandemic remains moderate because of lack of favorable regulatory framework.

COVID-19 Outbreak Boosts the Use of Telehealth Services

China and India are among the fastest growing telehealth markets in Asia. The number of telehealth providers in China increased from less than 150 to nearly 600 between late 2019 and early 2020. Telehealth platforms in India are witnessing increased interest from both patients as well as doctors. India’s leading health-tech firm, Practo, reported that 50 million people opted for teleconsultations through its platform between March 2020 and May 2020, representing 500% growth in teleconsultations during this time. 1mg Technologies, another telehealth service provider in India, indicated that between March 2020 and July 2020 nearly 10,000 doctors showed interest in signing up with the platform to offer teleconsultations. The company had only 150 doctors onboard until March 2020.

Japan, which is one of the largest healthcare markets, lagged in remote healthcare services because of stringent legislative policies. Remote consultations were allowed only for recurring patients and for limited number of ailments. Following the spike in COVID-19 cases, Japan temporarily eased restrictions on telehealth by allowing doctors to conduct first-time consultation online. Japan health ministry indicated that about 15% or 16,100 Japanese medical institutions (excluding dentists), offered telehealth services by July 2020. This shows phenomenal growth as in July 2018 only 970 of such Japanese healthcare institutions offered telehealth services.

In South Korea, telehealth was banned before COVID-19. This ban was lifted temporarily during the pandemic, but the long-term growth of telehealth in South Korea will depend on how the regulatory framework is shaped in the post-COVID era.

Vietnam also joined the telehealth upsurge as the country’s first telehealth app (developed by the Vietnamese multinational telecommunications company, Viettel) was launched amidst corona virus outbreak in April 2020.

Industry stakeholders seek to capitalize on telehealth boom

Healthcare providers have turned to telehealth to compensate for cancelled in-person consultations due to COVID-19 outbreak. This has encouraged providers to scale up their telehealth capabilities. For instance, over 56,000 doctors in France started teleconsultations by July 2020, as compared with only a few thousands at the beginning of the year.

Healthcare providers are not the only players looking to capitalize on the increase in demand for telehealth services. Other industry participants such as insurers and pharmacies are also exploring this segment.

In the USA, leading insurers such as Cigna, United Health, Aetna, Anthem, and Humana are partnering with telehealth providers to capitalize on the spurt in virtual healthcare demand. For instance, in February 2021, Cigna announced plans to acquire MDLive, Florida-based telehealth firm serving 60 million people across the USA, with a view to bring telehealth services in-house and reduce the patient-provider accessibility gap. Pharmacy giants Walgreens and CVS also extended access to telehealth services during COVID-19 crisis. In March 2021, a US-based digital retail pharmacy NowRx expanded into telehealth to provide care for HIV patients in California.

Since telehealth primarily encompasses delivery of healthcare services through digital and telecommunications platforms, telecoms and cable operators are uniquely positioned to organically expand in to telehealth space. Telecoms have the opportunity to expand in healthcare space by delivering telehealth as a value-added service. In October 2020, CommScope, an infrastructure solutions provider for communications networks, estimated that telehealth has the potential to create US$50 billion per year revenue opportunity for internet and telecom service providers in the USA.

Moreover, leading technology firms including Amazon, Microsoft, Salesforce, Tencent, Alibaba, and Alphabet are also investing in or considering to invest in telehealth. For instance, in January 2020, Alibaba launched an online coronavirus clinic, to offer remote assistance to patients across China.

Telehealth startups are mushrooming across the world and raking in millions in investment. Mercom Capital Group indicated that, in 2020, telehealth attracted nearly US$4.3 billion in venture funding. This represents 139% year-on-year increase compared to US$1.8 billion in 2019 implying that COVID-19 outbreak was the key driver behind the increased investment in telehealth.

Since everyone is trying to grab a piece of the growing telehealth market cake, this has led to flurry of M&A deals. Mercom Capital Group recorded 23 M&A transactions in telehealth space in 2020, up from 14 transactions in 2019.

EOS Perspective

COVID-19 outbreak worked as a catalyst resulting in dramatic increase in telehealth services utilization; whether this growth will continue in the long term, remains a question. This growth of telehealth market is primarily demand-driven. Thus, to sustain the growth momentum it would be imperative to overcome the challenges faced by the industry before the pandemic.

Ambiguous and often changing regulatory framework remains one of the biggest hindrances to telehealth. In order to tackle the spread of coronavirus, many countries temporarily relaxed their regulations for telehealth. However, it remains unknown whether countries will pull back the relaxations once the pandemic is over. Moreover, telehealth opens up doors for cross-border provision of healthcare services. This calls for development for a universal law for telehealth which is acceptable worldwide.

Further, the market will also largely depend on how the reimbursement policies evolve in the future. Historically, in many countries, reimbursement for teleconsultations has been lower than for in-person consultations. During the pandemic, the reimbursement amount was leveled in order to encourage adoption of telehealth. This proved to be a strong incentive driving the surge in telehealth. Post the pandemic, if the policies are changed again offering lower reimbursement for teleconsultations as compared with in-person visits, this could impact the growth momentum.

Data security and privacy concerns have long been debated as some of the biggest barriers for telehealth worldwide. Development of more secure platforms using technologies such as blockchain, AI, and Secure Access Service Edge (SASE) networks could potentially address these issues in future. Further applications of blockchain are being explored to improve operational transparency, increase protection of health records, and detect fraud related to patients’ insurance claims as well as physician credentials.

It is believed that the risk of misdiagnosis increases with telehealth as compared to in-person visits. This risk can be significantly reduced by integration of remote patient monitoring technologies with teleconsultations. IoT-enabled remote care monitoring technologies have been evolving by leaps and bounds. Teleconsultations carried out in conjunction with data collated from smart wearable devices can potentially help to cut down misdiagnoses.

Telehealth has become the new normal amidst coronavirus outbreak. While the telehealth market growth in the next 2-3 years could be attributed to pandemic crisis, the future will depend on how the regulatory framework will shape up and whether the industry will be able to tackle the challenges related to the technology implementation.

by EOS Intelligence EOS Intelligence No Comments

Commentary: Is Privatization Key to Self-sustainability for US Post?

United States Postal Service (USPS), one of the largest government entities in the USA with over 633,000 employees as of 2019, has been bleeding red ink on its financial statements for many years now, causing a worry that it might soon need a bail-out with tax-payers money. While majority of the crisis at USPS stems from several regulatory and legislative restrictions, privatization could help USPS to transform its business to align with changing market dynamics in the digital age and to secure sustainable future.

USPS is in dire need of a revamp

USPS, the largest postal system in the world, is feared to be gradually moving towards financial instability as the revenues are not able to meet the operational costs and liabilities.

USPS’ financial woes began with enactment of the Postal Accountability and Enhancement Act (PAEA) in 2006 which required USPS to create a US$72 billion reserve (equivalent to cost of employee post-retirement pension and health benefits during next 75 years) over a 10-year period from 2007 to 2016. This mandate added a huge financial burden and USPS has been registering losses every year since.

The situation is dire, as clearly stated in USPS’ five-year strategic plan (2020-2024), released in January 2020, highlighting the grim financial condition of the organization:

We have an underfunded balance sheet, significant debt, and insufficient cash to weather unforeseen cyclicality or changes in business conditions…we expect to run out of liquidity by 2021 if we pay all our financial obligations – and by 2024 even if we continue to default on our year-end, lump sum retiree health-benefit and pension related payments.

On February 5, 2020, US House of Representatives passed the US Fairness Act which repeals the prefunding mandate under 2006 legislation, thus, relieving USPS from financial burden of amassing huge reserves to fund retirement benefits. The reform does not exempt USPS from its obligations to its retired employees, but allows them to fund the costs on pay-as-you-go basis, a practice followed by most other government agencies and majority of private businesses in the USA. This bill still needs to be approved by the US Senate.

Even if the US Fairness Act becomes a law after being approved by the US Senate and the president, it does not seem to end all the challenges faced by USPS. The business has taken a major hit due to changing market dynamics with the rise of the Internet.

USPS’ largest revenue segment, i.e. First-Class Mail services, which include the delivery of letters, postcards, personal correspondence, bills or statements of account, as well as payments, has seen about 43% drop in volume between 2007 and 2019. This is because the mode of communication has changed drastically as email, mobile, social media, other tech-based platforms allow Americans to talk to one another instantaneously and mostly for free.

Marketing Mail, which includes advertisements and marketing packages, is another category that also took a hit because of the rise of digital media. Marketing Mail volume declined by more than one-fourth over the same period.

The package delivery service has experienced multi-fold increase with the rise of e-commerce, but it also faces growing competition from private players such as UPS or FedEx as well as e-commerce giants such as Amazon that are rapidly building and expanding their own network.

Due to the prefunding retirement benefit mandate, USPS has not been able to invest in new products and infrastructure since 2006. Rather than expanding its capabilities to capitalize on the new market opportunities, USPS had to take aggressive cost control measures and restricted investment in new service offerings, technology, and training.

Moreover, the coronavirus pandemic is adding to the woes of the agency. Though there has been an increase in online orders for medicines and food, the volume of letter mail, organization’s largest revenue stream, has seen a decline. Marketing mail category business has also gone down as a lot of companies have stopped advertising through mail. In April 2020, Congressman Gerry Connolly indicated that the mail volume could decline up to 60% by the end of the year. Further, USPS is facing a spike in expenses due to provision of necessary support and additional benefits to its workforce affected by the virus. In April 2020, Megan Brennan, then postmaster general, hinted that coronavirus-related losses could reach US$13 billion in this fiscal year.

USPS needs structural transformation to meet the demands of the digital age. USPS’ five-year strategic plan (2020-2024) emphasized that despite taking all possible measures such as cost control, technology upgradation, and service improvement, financial loses are likely to continue in absence of legislative and regulatory reforms.

Privatization to provide USPS with path towards self-sustainability?

Being a government entity, USPS is subject to many regulatory and legislative constraints which makes it less competitive than its private counterparts such as FedEx or UPS. For instance, under Universal Service Obligation, USPS is required to service all areas across the country six days a week. If privatized, USPS will be able to reduce the frequency of delivery on as-needed basis to optimize operations and control costs.

Similarly, USPS is legally obligated to serve all Americans, and hence closing down of any branches generally cause public uproar as locals in the remote and rural areas demand their right to postal service. A post office closure process takes at least 120 days during which affected public can appeal the decision. As per USPS’ five-year strategic plan (2020-2024) released in January 2020, about 36% of the retail post office locations are retained despite being unprofitable. Unlike private entities, USPS cannot easily close or consolidate underperforming non-profit facilities, a fact that adds to the financial strain for the organization.

Moreover, the pricing of the postal service, which ideally needs to be a business decision based on the cost structure and profit margins, is controlled by the US government. USPS needs approval from the government for making any changes in pricing of its products. While for private entities pricing is part of routine business decision-making, for USPS, unreasonable federal controls and limitations make it difficult to adopt a market-oriented pricing strategy for the services that USPS provides.

It is also to be noted that the average compensation offered by the USPS to it employees is higher than what private-sector workers receive. A study conducted by US Treasury found that, for 2017, the average employee costs at USPS was US$85,800, compared to US$76,200 at UPS and US$53,900 at Fed Ex. About fourth-fifth of the USPS workforce is unionized which means that salary increases occur through collective bargaining agreements. While disputes are resolved in binding arbitration, the financial health of USPS is often not given due consideration in the process. USPS could save significant costs by adopting private-sector labor and compensation standards.

Further, USPS is legally required to invest funds for retirement benefits only in treasury bonds which yield very low interest. The idea of conservatively investing retirement funds to avoid risk is reasonable, but the interest earned is too low compared to other investment returns commonly achieved by private entities. Thus, despite having large reserves, USPS is legally prohibited to make sound investment in debt and equity markets which could potentially yield higher returns.

Privatization and breaking away from these limitations would allow USPS to at least attempt to optimize its operations, amend service standards, provide more pricing flexibility, and earn greater return on investments.

EOS Perspective

Time and again, US president Donald Trump has proposed privatization of USPS to make it self-sustainable and profitable. Many countries across the world have illustrated how privatization of the postal service could be a success. For instance, a European Commission report tracking development in the postal sector between 2013 and 2016 indicated that post-privatization postal services were able to diversify their revenue sources, reduce the labor costs, upgrade technology and infrastructure, close unprofitable facilities, and improve delivery frequency based on demand – all the measures which USPS needs to take. Thus, privatization could potentially help USPS to transform its business towards self-sustainability.

It can be argued that upon privatization, USPS may lose certain privileges it enjoys as a government entity. For instance, at present, USPS is exempt from all government taxes, but if privatized, USPS will be subject to federal, state, as well as local taxes. USPS boasts huge workforce operating more than 31,000 post offices using 204,274 delivery vehicles as of 2019. When USPS is opened to competition, it will have the distinct advantage due to its wide-spread delivery network and last-mile delivery capabilities. From market point of view, levying taxes on USPS may actually create a level-playing field for all the postal delivery firms promoting healthy competition. This will in turn prove to be good for the overall development of the sector.

If the idea of USPS privatization floats through, e-commerce companies and retailers such as Amazon and Walmart could be interested in acquiring a majority stake. As the e-commerce business grows, such companies are investing billions of dollars in building logistics network and capabilities to acquire larger market share. Moreover, they already rely on USPS for last-mile delivery. For instance, as per a Morgan Stanley report released in 2018, Amazon accounted for about a quarter of USPS package business. Thus, USPS’ large delivery network and resources offer a great value proposition to these companies.

by EOS Intelligence EOS Intelligence No Comments

Moving Towards 5G – Slowly but Surely

5G technology started to become a buzzword around 2017, when it was still in a nascent stage of development, to say the least. Over the past two years, 5G has evolved from pilot testing phase to small-scale implementation. However, 5G full-scale deployment is yet to be seen and there are still many challenges to overcome. 5G is here, but it is still a long way before it becomes mainstream.

Developing 5G infrastructure is a costly affair

5G uses high frequencies and short wavelength to deliver faster speed and lower latency. Short wavelength requires shorter distance between the tower and the device, since the signal cannot penetrate buildings, trees, or other such obstacles. Therefore, telecom operators need to build 5G small-cell towers very close to the end-users, which is time consuming and expensive.

The high cost of investment is seen as a major pain point by majority of the telecom operators. A report released by a UK-based capital finance firm Greensill in February 2019 indicated that the investment in global 5G telecom infrastructure will reach US$1 trillion by 2020.

Network sharing is increasingly seen as a rational approach to reduce the individual cost of investment. In February 2018, McKinsey estimated that if three players share the 5G network, the individual costs can be reduced by 50%. However, setting up a collaboration with other telecom operators to share networks is a complex and time-consuming process. On an average, it takes about six to nine months to finalize a network sharing agreement. Each telecom operator will need to ink many such network sharing contracts to achieve wide-spread coverage of their services.

Despite the hype, demand for 5G is currently rather moderate

Despite all the promises of high-speed and uninterrupted internet connectivity, 5G is not seen as an immediate necessity. This is because the existing technology, 4G LTE, is able to fulfill most of the current consumer needs. The average 4G LTE data speed globally is estimated at around 17Mbps. Thus, 4G LTE provides sufficient speed for some of the most common mobile applications such as music streaming (~1Mbps), 1080p HD video (~5Mbps), and even online games such as Fortnite (~3Mbps).

As per a study conducted by PWC in September 2018, only about a third of 1,000 home and mobile internet users surveyed in the USA were willing to pay a premium for 5G, provided 5G delivers speed and low latency as claimed by the telecom operators. Moreover, survey finds that, for 5G internet service, home internet users were willing to pay a marginal amount of US$5.06 on average as monthly premium in addition to their current spending on 4G. Mobile internet users were willing to spend even less, a monthly premium of US$4.40 on average. To compare, a US-based telecom operator Verizon offers unlimited 4G data and calls for US$65 per month.

Moreover, most of the 4G devices do not support 5G networks, thus require consumers to spend additionally on 5G-compatible devices. This additional cost factor is also expected to act as a deterrent for mass adoption of 5G in the near term. Another survey (conducted by PWC in May 2019) of 800 internet users in the USA found that if a new device was required to access 5G, 70% of the respondents would not be willing to buy a new 5G-compatible device as soon as it was available, rather wait until they were eligible for an upgrade.

Thus, the marketing hype created around 5G have got consumers intrigued about the technology, however, they are not open to spending generously on the 5G experience.

Net neutrality law dampens motivation to invest in 5G

5G would enable network slicing allowing telecom operators to dedicate a portion or slice of their 5G network with certain functionality such as connectivity, speed, or capacity. In other words, network slicing creates various networks that share the same physical infrastructure without impacting other network functionalities.

For instance, in automated cars, one slice could be used for watching Netflix and other could be used for exchanging reliable information with other cars to avoid any road accidents. Network slicing is a real opportunity for telecom operators to optimize their 5G networks to address different needs of specific application areas.

Furthermore, differentiated services provided with each network slice using the same physical infrastructure are likely to increase revenue potential for telecom operators. A research study conducted by Ericsson in 2018 concluded that telecom operators can generate up to 35% more in revenue using network slicing (the study assumed a 5G mobile broadband had 25 million subscribers with 40 unique services launched per year over the period of five years).

However, the net neutrality regulation adopted by many countries across the world does not permit the use of network slicing technique. Net neutrality laws are in effect in the EU since 2016. In North America, Canada has net neutrality regulation in place, but in the USA the status of the law is under review. Most countries in South America have national laws to protect net neutrality. In Asia, Japan, South Korea, and India are among the few countries with net neutrality regulation. Africa, in particular, is lagging behind other regions in developing concrete framework to protect net neutrality.

The net neutrality law dictates telecom operators to treat all internet communications equally and prohibits them to charge differently for different internet services. Net neutrality law does not allow the telecom operators to use network slicing technique to create distinguished service offerings by blocking any part of bandwidth for a particular application or user group.

Telecom operators argue that this impacts the roll out of mission-critical and emergency services such as remote surgery which needs to be given priority over other applications. With net neutrality in the picture, telecom operators would not be able to benefit from the key feature of 5G technology, network slicing. This may hinder the overall 5G development.

As telecom operators voice their concerns, regulators across the world are reviewing net neutrality laws. EU opened consultations with industry stakeholders as telecom operators in the region propose 5G to be classified as a specialized service which is exempted from net neutrality laws.

In the USA, the status of net neutrality law (introduced in 2015) remains unclear. In June 2018, the Federal Communications Commission (FCC) repealed net neutrality regulation, however the decision was opposed by 22 states. State legislators have challenged the FCC decision in the US Court of Appeals and proposed to authorize the state-level legislations to re-instate net neutrality laws. In the 2019 legislative session, 29 states introduced laws to protect net neutrality at state level.

5G to multiply data privacy and security risks

5G does not drastically change the risk factors similar to those in the existing communication technologies (i.e. 2G, 3G, and 4G), however, it is going to dramatically increase the potential points of cyberattacks. This is due to the fact that the advent of 5G is expected to result in exponential increase in the number of connected devices and associated network data traffic, which will significantly expand the number and scale of cyber vulnerabilities.

A study (released in May 2019 by Business Performance Innovation (BPI) Network, a professional networking organization) based on a global survey of 145 telecom industry professionals, indicated that 94% of respondents believed that 5G will increase security and reliability concerns.

Another survey conducted in June 2019 by Cradlepoint, a cloud-based networking solutions provider, indicated that 73% of the 200 respondents (working with telecom operators) acknowledged that security concerns might delay the 5G adoption.

Explore our other Perspectives on 5G

Industry is turning to standardization and regulatory bodies for guidance on minimizing security threats associated with 5G. But existing standards do not fully address the data privacy and security concerns.

For instance, the existing 5G standard employs Authentication and Key Agreement (AKA) protocol which is a mutually authenticating system between the user device and 5G network. However, in late 2018, it was discovered that the 5G AKA has at least two vulnerabilities that could compromise users’ data privacy and security. Firstly, it allows interception of the communication between two users, enabling cyber spies to steal personal information or corrupt data. Further, the vulnerability in 5G AKA protocol could allow cyber criminals to bill the phone call or other charges to legitimate users.

5G standards are still under development and will take some time to come into effect. Since 5G is a new technology, many data privacy and security threats still remain unidentified. In anticipation of potential security flaws, telecom operators may adopt a wait-and-see approach before moving to wide-scale commercial deployment of 5G.

5G draws criticism over possible health concerns

It is believed that prolonged exposure to electromagnetic radiation from 5G networks can be harmful to human health. In 2011, cellular radiation was classified as a possible carcinogen by World Health Organization. 5G radiation is also claimed to be linked to premature aging, disruption of cell metabolism, as well as neurological disorders. However, there is little evidence to understand the actual extent of the harm caused, and therefore many countries are not giving this issue due attention.

However, rising health concerns are not going unnoticed. In September 2017, 180 medical professionals and scientists from 36 countries recommended the European Commission to postpone the deployment of the 5G network until the potential risks for human health and environment are thoroughly investigated and proven. In response, the European Commission indicated that the member states are responsible for protecting their citizens from harmful effect of electromagnetic radiation and they can introduce choice of measures based on the demographics. This means that, in the future, if the presumed adverse effect of 5G radiation on human health is proven to be true, countries can impose protectionary measures which would limit the development of 5G.

Some countries have already taken a cautious approach to 5G deployment in view of potential health risks. An example of this could be Belgium stopping a 5G test in Brussels in April 2019 due to difficulty in measuring electromagnetic radiation emissions. Around the same time, Swiss government also announced plans to introduce radiation monitoring systems to continually assess health risks posed by 5G radiation. Earlier in September 2018, Mill Valley, a city in San Francisco, USA, banned deployment of small-cell 5G towers in the city’s residential areas.

Thus, growing concerns over impact of 5G on human health is expected to further delay the 5G development and adoption.

Moving Towards 5G – Slowly but Surely nu EOS Intelligence

1) According to McKinsey estimates (February 2018) based on the assumption that three players share the 5G network
2) Based on survey of 1,000 home and mobile internet users in the USA conducted in September 2018 by PWC
3) Based on survey of 800 home and mobile internet users in the USA conducted in May 2019 by PWC
4) As per Ericsson 2018 study, assuming a 5G mobile broadband having 25 million subscribers with 40 unique services launched per year over the period of five years
5) According to May 2019 study by Business Performance Innovation (BPI) Network
6) Based on a survey conducted by Cradlepoint in June 2019

EOS Perspective

While the 5G technology era has arrived, wide-scale commercial deployment is moving slowly amidst challenges it is facing. Cradlepoint study indicated that 46% of the 200 telecom industry professionals surveyed in June 2019 had made little or no preparations for 5G deployment.

4G (introduced in 2009) accounted for 43% of the total mobile subscriptions globally by the end of 2018. Even after a decade, there are still many regions where people do not have access to 4G.

Transitioning from existing communication technologies to 5G is more complex, costly, and time-consuming. Hence, 5G is years away from full-scale commercial deployment. GSMA, an industry association with over 750 telecom operators as members, predicts that while 4G will continue to grow to reach 60% of the global mobile subscriptions in 2025, 5G will account for just 15% of the market by then.

5G has been in the news for some time now and it is marketed as the future of communication and internet technology. 5G has gone through many upgrades and is deemed ready for commercial deployment, at least on a small scale. Many leading telecom operators today are preparing for the rollout of 5G networks while uncovering new challenges in the process.

The road to 5G might be longer than expected, given the challenges on the way. TBR, a technology research firm, expects that only few trailblazers would have attempted to deploy 5G by the end of 2019. Majority of telecom operators will deploy 5G between 2020 and 2026. Laggards will follow them and continue with 5G deployment till 2030.

Global Economy Bound to Suffer from Coronavirus Fever
by EOS Intelligence EOS Intelligence No Comments

Global Economy Bound to Suffer from Coronavirus Fever

Global economy has slowed down in response to coronavirus. Factories in China and many parts of Europe have been forced to halt production temporarily as some of the largest manufacturing hubs in the world battle with the virus. While the heaviest impact of the virus has been (so far) observed in China, global economy too is impacted as most industries’ global supply chains are highly dependent on China for small components and cheaper production rates.

China is considered to be the manufacturing and exporting hub of the world. Lower labor costs and advanced production capabilities make manufacturing in China attractive to international businesses. World Bank estimated China’s GDP in 2018 to be US$13.6 trillion, making it the second largest economy after the USA (US$20.58 trillion). Since 1952, China’s economy has grown 450 fold as compared with the growth rate of the USA economy. International trade and investment have been the primary reason for the economic growth of the country. This shows China’s strong position in the world and indicates that any disturbances in the country’s businesses could have a global effect.

On New Years’ Eve 2019, an outbreak of a virus known as coronavirus (COVID-19) was reported in Wuhan, China to the WHO. Coronavirus is known to cause respiratory illness that ranges from cough and cold to critical infections. As the virus spreads fast and has a relatively high mortality rate, the Chinese government responded by quarantining Wuhan city and its nearby areas on January 23, 2020. However, this did not contain the situation. In January 2020, WHO designated coronavirus a “public health emergency of international concern” (PHEIC), indicating that measures need to be taken to contain the outbreak. On March 11, 2020, WHO called coronavirus a pandemic with the outbreak spreading across about 164 countries, infecting more than 190,000 people and claiming 7,800+ lives (as of March 18, 2020).

Coronavirus threatening businesses in China and beyond

Businesses globally (and especially in China) are feeling the impact of coronavirus. Workers are stuck in their homes due to the outbreak. Factories and work places remain dormant or are running slower than usual. Also, the effects of coronavirus are spreading across the globe. Initially, all factory shutdowns happened in China, however, the ripple effects of the outbreak can now be seen in other parts of the world as well, especially Italy.

Automotive industry

Global automobile manufacturers, such as General Motors, Volkswagen, Toyota, Daimler, Renault, Honda, Hyundai, and Ford Motors, who have invested heavily in China (for instance, Ford Motor joined ventured with China’s state-owned Chongqing Changan Automobile Company, Ltd., one of China’s biggest auto manufacturers) have shut down their factories and production units in the country. According to a London-based global information provider IHS Markit, Chinese auto industry is likely to lose approximately 1.7 million units of production till March 2020, since Wuhan and the rest of Hubei province, where the outbreak originated, account for 9% of total Chinese auto production. While the factories are reopening slowly (at least outside the Wuhan city) and production is expected to ramp up again, it all depends on how well the outbreak is contained. If the situation drags on for few months, the auto manufacturers might face significant losses which in turn may result in limited supply and price hikes.

American, European, and Japanese automobile manufacturers, among others, are heavily dependent on components supplied from China. Low production of car parts and components in China are resulting in supply shortages for the automakers globally. UN estimates that China shipped close to US$35 billion worth of auto parts in 2018. Also, according to the US Commerce Department’s International Trade Administration, about US$20 billion of Chinese parts were exported to the USA alone in 2018. A large percentage of parts are used in assembly lines that are used to build cars while remaining are supplied to retail stores. Supply chain is crucial in a connected global economy.

Coronavirus outbreak poses a risk to the global automotive supply chain.

South Korea’s Hyundai held off operations at its Ulsan complex in Korea due to lack of parts that were supposed to be imported from China. The plant manufactures 1.4 million vehicles annually and the shutdown has cost approximately US$500 million within just five days of shutting down. However, Hyundai is not the only such case. Nissan’s plant in Kyushu, Japan adjusted its production due to shortage of Chinese parts. French automaker Renault also suspended its production at a plant in Busan, South Korea due to similar reasons. Fiat Chrysler predicts the company’s European plant could be at risk of shutting down due to lack of supply of Chinese parts.

However, very recently, automobile factories in China have started reopening as the virus is slowly getting contained in the region. While Volkswagen has slowly started producing in all its locations in China, Nissan has managed to restart three of its five plants in the country.

That being said, auto factories are facing shutdowns across the world as coronavirus becomes a pandemic. Ford Chrysler has temporarily shut down four of its plants in Italy as the country becomes the second largest affected nation after China.

Automobile supply chains are highly integrated and complex, and require significant investments as well as a long term commitment from automobile manufacturers. A sudden shift in suppliers is not easy. The virus is spreading uncontrollably across Europe now and if France and Germany are forced to follow Italy’s footsteps of shutting down factories to contain its spread, this will spell doom for the auto sector as the two countries are home to some of the biggest automobile manufacturers in the world.

Technology industry

China is the largest manufacturer of phones, television sets, and computers. Much of the consumer technologies from smartphones to LED televisions are manufactured in China. One of the important sectors in the technology industry is smartphones.

The outbreak of coronavirus is bad news for the technology sector, especially at the verge of the 5G technology roll-out. Consumers were eagerly waiting for smartphone launches supporting 5G but with the outbreak, the demand for smartphones has seen a decline. According to the China Academy of Information and Communications Technology, overall smartphone shipments in China fell 37% year over year in January 2020.

Foxconn, which is a China-based manufacturing partner of Apple, has iPhone assembling plants in Zhengzhou and Shenzhen. These plants, which make up a large part for the Apple’s global iPhone assembly line, are currently facing a shortage of workers that will ultimately affect the production levels of iPhone in these factories. According to Reuters, only 10% of workers resumed work after the Lunar New Year holiday in China. As per TrendForce, a Taiwanese technology forecasting firm, Apple’s iPhone production is expected to drop by 10% in the first quarter of 2020.

Moreover, Apple closed down all its retail stores and corporate offices in the first week of February 2020 in China in response to the outbreak. On March 13, 2020, it reopened all of its stores in China as the outbreak seems to be under control. However, while Apple seems to recover from the outbreak in China, it is equally affected by store shutdowns in other parts of the world (especially Europe). On March 11, Apple announced that all stores in Italy will be closed until further notice. Italy has been hit by the virus hard after China. The Italian government imposed a nationwide lockdown on the first week of March 2020.

On the other hand other multinational smartphone giants such as LG, Sony Mobile, Oppo, Motorola, Nokia, and many others have delayed their smartphone launches in the first quarter of 2020 due to the outbreak.

The coronavirus outbreak is more likely to be a disaster for smartphone manufacturers relying on China.

Other sectors such as LCD panels for TVs, laptops, and computer monitors are mostly manufactured in China. According to IHS Markit, there are five LCD factories located in the city of Wuhan and the capacity at these factories is likely to be affected due to the quarantine placed by the Chinese government. This is likely to force Chinese manufacturers to raise prices to deal with the shortage.

According to Upload VR, an American virtual reality-focused technology and media company, Facebook has stopped taking new orders for the standalone VR headset and also said the coronavirus will impact production of its Oculus Quest headset.

Shipping industry

In addition to these sectors, the new coronavirus has also hit shipping industry hard. All shipping segments from container lines to oil tanks have been affected by trade restrictions and factory shutdowns in China and other countries. Shipyards have been deserted and vessels are idle awaiting services since the outbreak.

According to a February 2020 survey conducted by Shanghai International Shipping Institute, a Beijing based think-tank, capacity utilization at major Chinese ports has been 20%-50% lower than normal and one-third of the storage facilities were more than 90% full since goods are not moving out. Terminal operations have also been slow since the outbreak in China. The outbreak is costing container shipping lines US$350 million per week, as per Sea-Intelligence, a Danish maritime data specialist.

According to Sea-Intelligence, by February 2020, 21 sailings between China and America and 10 sailings in the Asia-Europe trade loop had been cancelled since the outbreak. In terms of containers, these cancellations encompass 198,500 containers for the China-America route and 151,500 boxes for the Asia-Europe route.

Moreover, shutting down of factories in China has resulted in a manufacturing slowdown, which in turn is expected to impact the Asian shipping markets. European and American trade is also getting affected as the virus spreads to those continents. US retailers depend heavily on imports from China but the outbreak has caused the shipping volumes to diminish over the first quarter.

The USA is already in the middle of a trade war with China that has put a dent in the imports from China. National Retail Federation (world’s largest retail trade association) and Hackett Associates (US based consultancy and research firm) projects imported container volumes at US seaports is likely to be down by 9.5% in March 2020 from 2019. The outbreak is heavily impacting the supply chains globally and if factory shutdowns continue the impact is more likely to be grave.

Read our other Perspectives on US-China tensions: Sino-US Trade War to Cause Ripple Effect of Implications in Auto Industry and Decoding the USA-China 5G War

Other businesses

In addition to the auto, technology, and shipping industries, other sectors are also feeling the heat from the outbreak. Under Armour, an American sports clothing and accessories manufacturer, estimated that its revenues are likely to decline by US$50-60 million in 2020 owing to the outbreak.

Disney’s theme parks in California, Shanghai, Tokyo, and Hong Kong have been shut down due to the outbreak and this is expected to reduce its operating income by more than US$175 million by second quarter 2020.

Further, IMAX, a Canadian film company, has postponed the release of five films in January 2020, due to the outbreak.

Several fast food chains have been temporarily shut down across China and Italy, however, most of them have opened or are in the process of reopening in China as the outbreak is slowly coming under control there. While the global fast food and retail players have limited exposure in China, they are suffering huge losses in Europe, especially Italy. The restaurant sector is severely impacted there, where all restaurants, fast food chains, and bars have been shut down temporarily till April 3 in an attempt to contain the outbreak.

Another significantly affected industry is the American semiconductor industry as it is heavily connected to the Chinese market. Intel’s (a US-based semiconductor company) Chinese customers account for approximately US$20 billion in revenue in 2019. Another American multinational semiconductor and telecommunications equipment company, Qualcomm draws approximately 47% of its revenue from China sales annually. The outbreak is making its way through various industries and global manufacturers could now see how much they have become dependent on China. Although the virus seems to be getting under control as days pass, the businesses are not yet fully operational. Losses could ramp up if the virus is not contained soon.

Global Economy Bound to Suffer from Coronavirus Fever by EOS Intelligence

 

Housebound consumers dealing with coronavirus

Since the virus outbreak, people across many countries are increasingly housebound. Road traffic in China, Italy, Iran, and other severely affected countries has been minimized and public places have been isolated. People are scared to go out and mostly remain at home. This has led local businesses such as shopping malls, restaurants, cinemas, and department stores to witness a considerable slowdown, while in some countries being forced to shut down.

TV viewing and mobile internet consumption on various apps have increased after the outbreak. According to QuestMobile, a research and consultancy firm, daily time spent with mobile internet rose from 6.1 hours in early January 2020 to 6.8 hours during Lunar New Year (February 2020).

While retail outlets and other businesses are slower, people have turned to ordering products online. JD.com, a Chinese online retailer, reported that its online grocery sales grew 215% (year on year) to 15,000 tons between late January and early February 2020. Further, DingTalk, a communication platform developed by Alibaba in 2014, was recorded as the most downloaded app in China in early February 2020.

EOS Perspective

International businesses depend heavily on Chinese factories to make their products, from auto parts to computer and smartphone accessories. The country has emerged as an important part in the global supply chain, manufacturing components required by companies globally. The coronavirus outbreak has shaken the Chinese economy and global supply chains, which in turn has hurt the global economy, the extent of which is to be seen in the months to come. Oxford Economics, a global forecasting and analysis firm, projected China’s economic growth to slip down to 5.6% in 2020 from 6.1% in 2019, which might in turn reduce the global economic growth by 0.2% to an annual rate of 2.3%.

A similar kind of outbreak was seen in China in late 2002 and 2003, with SARS (Severe Acute Respiratory Syndrome) virus. China was just coming out of recession in 2003 and joined the World Trade Organization, attaining entrance to global markets with its low cost labor and production of cheaper goods. The Chinese market was at its infancy at that time. As per 2004 estimates by economists Jong-Wha Lee and Warwick J. McKibbin, SARS had cost the global economy a total of about US$40 billion. After SARS, China suffered several months of economic retrenchment.

The impact of coronavirus on Chinese as well as global economy seems to be much higher than the impact of SARS, since COVID-19 has spread globally, while China has also grown to be the hub for manufacturing parts for almost every industry since the SARS outbreak. In 2003, China accounted for only 4% of the global GDP, whereas in 2020, its share in the global GDP is close to 17%.

Currently, the key challenge for businesses would be to deal with and recover from the outbreak. On the one hand, they need to protect their workers safety and abide by their respective governments’ regulations, and on other hand they need to safeguard their operations under a strained supply chain and shrunken demand.

In the current landscape, many businesses in China have reopened operations but the outbreak is rapidly spreading to other parts of the world (especially Europe and the USA), where it is impacting several business as well as everyday lives. The best thing for manufacturing companies in this scenario is to re-evaluate their inventory levels vs revised demand levels (which may differ from industry to industry), and consider a short-term re-strategizing of their global supply chains to ensure that raw materials/components or their alternates are available and accessible – bearing in mind their existing production capability with less workers and customer needs during this pandemic period.

With the rapid spread of the virus, it seems that the outbreak is likely to cause considerable damage to the global economy (both in terms of production levels as well as psychological reaction on stock markets), at least in the short term, i.e. next 6 months. However, many experts believe that the situation should soon start coming under control at a global level. For instance, some experts at Goldman Sachs, one of the world’s largest financial services companies, believe that while this pandemic will bring the lowest growth rate of the global GDP in the last 30 years (expected at 2% in 2020), it does not pose any systematic risks to the world’s financial system (as was the case during the 2008 economic crisis).

Having said that, it is difficult to estimate what real impact the coronavirus will have on the global economy yet, and if opinions such as Goldman Sachs’ are just a way to downplay the situation to keep the investors calm. It is more likely to depend on how long the virus continues to spread and linger and how effectively do governments around the world are able to contain it.

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Media Players Push the Envelope to Sway in on Streaming Arena

The emergence of online entertainment has led to consumers transitioning from a fixed time-based entertainment on TV to on-demand watching across a wide array of devices. Continuously shifting viewing preferences will further expand digital mode of entertainment thus intensifying the competition between online streaming services and other entertainment providers. This will likely set the tone of how traditional entertainment players refurbish their business objectives and modify their operational models to acquire and retain consumers in the times ahead.

Online video streaming soars, both in subscribers and revenue

In early 2000’s if one wished to watch a movie at home, it meant day(s) of wait before the DVD arrived at the doorstep via mail. However, in 2007, when Netflix launched its online video streaming service, it started a new wave in the entertainment world – the ability to enjoy your favorite movie at the click of a button without having to wait for it to be delivered. This marriage of content and digital technology gave consumers an exciting experience of viewing content in a new way. Since then, video streaming has come a long way and now is a multi-billion dollar industry. In 2018, the video streaming industry was valued at US$ 36.64 billion and is expected to grow at a CAGR of 19.6% between 2019 and 2025, reaching a value of US$ 124.57 billion by 2025.

A surge in the number of devices supporting digital media, increasing internet speed, and the ease to access content (be it information, entertainment, or social) anytime, anywhere is driving the growth of online content.

As the demand for digital on-demand content is growing, consumers are spending more on subscription video on demand (SVOD) such as Netflix and Amazon Prime, making it the most commonly used video service in the over-the-top (OTT) content (content delivered via internet) market – in 2018, of the total global OTT revenue of US$ 67.8 billion, SVOD generated nearly 53% of the revenue standing at US$ 36 billion. SVOD revenue is estimated to reach US$ 87 billion by 2024.

According to global information provider, IHS Markit, the number of global subscribers to online video services such as Netflix and Amazon Prime increased by 27% in 2018 and reached 613.3 million subscribers, an increase of 131.2 million in comparison to 2017. The top three online streaming players account for 45% of this share – Netflix with 155 million subscribers (148 million paid users, with another 7 million using trial accounts), Amazon Prime with 100 million subscribers, and Hulu with 28 million subscribers (26.8 million paid users, with an additional 1.3 million using promotional accounts), totaling to 283 million subscribers.

Media Players Push the Envelope to Sway in on Streaming Arena by EOS Intelligence

Cable TV bearing the brunt

Online video subscriptions (613.3 million) surpassed cable subscriptions (that stood at 556 million, a 2% decrease from 567 million in 2017) for the first time in 2018. However, the online subscription video platforms generated nearly three times less revenue than cable TV, mainly due to low subscription rates. These affordable rates coupled with the flexibility to watch any program at any convenient time has resulted in a drop in the viewership of the television network.

Cable and satellite providers, to some extent, are taking a beating from online streaming as consumers are abandoning traditional cable for streaming services. In the USA, consumers spend US$ 23.3 billion annually on home entertainment, of this 75% (US$ 17.5 billion) is spent on digital entertainment, which depicts the fact that people are spending more on online subscriptions than on the cable TV. This implies that consumers prefer viewing content online than on cable TV, which is further reinforced by the low subscription rates for online services. As a consequence, in 2018, two of the largest direct broadcast satellite service providers in the USA, AT&T-owned DirecTV and Dish Network Corporation’s DishTV, reported losing 1.24 million and 1.13 million subscribers, respectively.

Consumers prefer viewing content online than on cable TV, which is further reinforced by the low subscription rates for online services.

While both players lost a huge number of viewers of the cable television services, during the same year, they were also the largest aggregators through their streaming cable services, namely, DirectTV Now (owned by AT&T) and Sling TV (owned by Dish), which added 436,000 and 205,000 new subscribers each. This shift denotes a change in the way people consume content, choosing a plan that is cable-like but shifting to streaming services at low price point making budgetary cuts while still enjoying favorite programs.

For providers that offer both pay-tv and online subscription as part of their service portfolio, staying afloat in this competitive arena is easier since consumers can shift from one package to another (according to changes in their financial capabilities) and the company does not end up losing customers.

However, for traditional cable companies, the situation is more difficult than expected. In 2018, the top six cable companies in the USA (Comcast, Charter, Cox, Altice, Mediacom, and Cable One) lost a combined 910,000 TV subscribers in comparison to 660,000 subscribers lost in 2017 (38% more in a year). Large cable telecommunications companies such as Comcast and Charter are still in a better position to deal with the situation owing to various business verticals and strong financial records. It is the small players operating in limited territories who are in a muddle – they need to look for alternative ways (other than offering cable TV services, subscribers for which are drastically reducing) to keep their businesses afloat.

Other than losing customers, they are also challenged by the increasing negotiations with programmers (for distributing content via cable) who now have the alternative to broadcast their content via online partners, eliminating the need of cable middleman.

However, unlike in the USA, where the online streaming market is pretty much advanced, in other less developed parts of the world, the development of online streaming platforms is still in its infancy. In the immediate future, it is expected that the streaming services will not be able to cause major impact on traditional video platforms in these geographies, as the adoption of video streaming will be restricted mainly by slow internet connectivity, unlike in the USA, where 5G services are on the brink of being launched.

Constantly evolving entertainment landscape, not without challenges

Online streaming is disrupting the traditional mode of video entertainment challenging the domination of TV as the main entertainment hub. Ascent of digital media players such as Netflix, Amazon, or YouTube, is posing major challenges for other players such as content production studios, cable companies, and media networks thus compelling them to develop new business models and adapt to compete with online streaming players.

To catch up with the changing dynamics of the industry, players from all verticals (including media houses, internet providers, telecom companies, distributors, etc.) in the entertainment industry are revising their business choices and strategically launching new product and services.

Media companies are reformulating their business models by including exclusive streaming services into their overall product and service portfolio. For instance, Disney, US-based mass media and entertainment company, is planning to launch its suite of direct-to-consumer (DTC) services in 2019 starting with Disney+ (to be launched in the USA in November, 2019, followed by launch in Asia and Europe in 2020 and 2021, respectively) focusing on delivering original productions, with all content available for offline viewing. It is estimated that Disney+ is likely to attract up to 90 million subscribers by 2024, nearly more than two times of what Netflix accomplished in five years.

In another example, Comcast-owned mass media house, NBCUniversal, announced the launch of its ad-supported streaming service in April 2020. The service will be free if viewers watch TV through a paid provider with NBCU access (including Comcast and Sky) but one can opt for subscription service to eliminate ads. To start with, the service will focus on licensed content with some original programming.

Recently acquired Time Warner, now named WarnerMedia (acquired by AT&T), also plans to launch its streaming service by the end of 2019 with three tiers of options – an entry-level package focused on movies, premium service with original programming and blockbuster movies, and third option that offers content from the first two packages plus an extensive library of WarnerMedia and licensed content.

With more and more players venturing into the streaming territory and offering new and fresh content, the competition is only going to get harder for Netflix and the likes of it. Players who lack in offering content volume-wise, even though successful in launching their streaming services, will find it difficult to survive, in the medium term, especially when offering premium subscriptions.

Players who lack in offering content volume-wise, even though successful in launching their streaming services, will find it difficult to survive, especially when offering premium subscriptions.

Other than media companies, pure-play cable operators are also feeling the heat of the ever-changing entertainment landscape. As the majority of viewers receiving at-home-video services through means other than traditional cable subscription increases, cable TV players are left with no choice but to look for alternative ways to engage with the market. Increasing demand for broadband services is a saving grace for cable operators in this situation. For example, cable provider, Comcast, is becoming more broadband-centric than cable-centric and shifting its focus to high-speed internet services since customers have started dumping high-priced TV services for cheaper streaming services. The company, in March 2019, launched a streaming platform, Xfinity Flex, targeted at broadband internet services customers (who do not use the company’s cable services). The service offers customers set-top streaming box that includes Netflix, Prime Video, HBO, and other apps, and voice control to manage all of the connected devices in their homes.

However, for cable operators, the situation will only worsen in the future. High-speed internet access market, currently dominated by cable operators, will soon be challenged by the rollout of 5G wireless technology by telecom companies such as Verizon, AT&T, T-Mobile, and Sprint, among others. The implementation of 5G services will be a whole new ballgame, highly likely to transform the online viewing experience, and it will be interesting to see how exactly this space will be changed.

New entrants challenging the players

If the TV content and service providers were already not in deep waters due to the rise of online streaming, entry of retail and media players into the entertainment sector has not made the situation any better. Though these entrants are most likely going to be a direct competition for the video streaming players rather than the traditional ones, it cannot be denied that this may be a potential threat to the entire entertainment industry.

In May 2019, retail chain, Walmart, that bought Vudu, content delivery and media technology company in 2010, launched a video service offering more than 8,000 movies and TV shows for viewers to watch for free (with ads), as well as a library of more than 150,000 movies and TV titles that people can purchase or rent. The company dropped its initial plans to launch Vudu as a streaming service (competing with Netflix) citing huge investment requirement and lack of experience in producing original content as the reasons. However, the idea was not off the table for too long, as the company announced a list of original content programs including reviving an old movie to be delivered in 11-minute installments, a travel show, an entertainment series, and a crime thriller. Vudu is currently focused on developing content that costs much less than other top video streaming service providers spend on original content, which costs them billions of dollars; the future vision takes the path of reaching the front of the pack slowly and steadily.

In another example from 2018, Snapchat, a multimedia messaging app, launched Snap Originals, offering premium content (with episodes lasting for about five minutes) created exclusively for Snapchat’s users to be viewed on their mobiles. The content includes a range of genres including drama, comedy, documentary, etc., and is developed in partnership with film and television writers and producers.

EOS Perspective

The amount of money viewers spent globally on entertainment reached US$ 55.7 million in 2018, an increase of approximately 16% in comparison to 2017 (US$ 48.1 million). Between 2014 and 2018, consumers’ entertainment spending increased nearly 1.5 times driven by increased expenditure on digital entertainment (including electronic sell-through, video-on-demand, and paid subscriptions). The digital entertainment spending in 2018 was US$ 42.6 million in comparison to US$ 15.7 million in 2014, an increase of 171%, exhibiting a giant move towards digital viewing.

There has been a plethora of cases where TV players have either launched new ideas and concepts or joined hands with other players (in the same realm or similar playfield) to have a foothold in the otherwise challenging entertainment industry. With more and more options congesting the already tight, but diverse streaming video topography, it is most likely going to present increasing competition for traditional television. This, topped with dropping numbers of television viewers globally, only adds to the inevitable nostalgic observation that television may become obsolete, if not dead, in the next five to six decades.

Developing content and building own platforms for streaming videos does not come cheap – players will have to invest billions of dollars in developing content whilst losing revenue by not selling distribution rights to third-party networks and distributors. This stands true for content creators such as Disney and WarnerMedia, who are likely to gradually withdraw their content from online streaming platforms to be broadcasted on their own networks. For instance, Disney will bear an estimated loss of US$ 300 million in annual revenues it currently gets from Netflix for pay-tv rights to its theatrical releases. Thus, it is clear that shifting to a newer streaming business model will not only be costlier but also riskier since it would be difficult to ascertain beforehand how well the content will be accepted by the viewers. Nonetheless, in the current scenario, where there is always demand for more content, players hardly have any other alternative to explore.

The outlook for video entertainment, in the short to medium term, looks promising with coalition among various operators’ in reshaping the video media scene. It can be expected that potential partnerships, particularly among content creators and service (internet and mobile network) providers, if done right, could be a tough nut to crack for pure-play online streaming operators.

Potential partnerships, particularly among content creators and service (internet and mobile network) providers, if done right, could be a tough nut to crack for pure-play online streaming operators.

Nevertheless, given the low-price point and round the clock content availability, it can be anticipated that online streaming business will continue to see significant growth in the years to come. For other players, it is important to understand that while their direct audience is shifting, it is not vanishing – just that viewers are watching the content via different modes. Thus, in the long haul, it will be necessary for players to offer a combination of traditional TV packages along with online streaming plans and become a one-stop-shop for content to retain old customers and signing up new subscribers. However, for the businesses, the challenge lies in knowing what offerings to create and whom to partner with, all while retaining customers and generating revenue in the constantly evolving entertainment topography.

Looking at the current scenario, it is apparent that digital platform players will further continue to disrupt (and redefine) the TV and video market in the future. To survive, industry-wide alliances in the form of joint production, partnerships, and mergers are an obvious choice to make. However, in their desperate attempt to stay ahead, it can be expected that companies will try to come up with innovative solutions, something that is neither exactly a cable TV offering nor a video that can be streamed online, but an experience that enthralls the viewers and keeps them hooked to the device of their choice.

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Monetizing 5G: The Road Ahead for Telecom Operators

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A new era of mobile communication and data services is set to begin as telecom operators across the world are priming for roll out of 5G. As per the estimates by Hadden Telecoms, a UK-based consultancy firm, as of August 2019, 287 telecom operators have invested in 5G deployment across 105 countries. Investments span across various facets of 5G technology including ongoing 5G base-station deployment and other infrastructure development, commercial service launches, future commitments or contracts to deploy 5G networks, pilot testing and trials, and research studies. As 5G seems to be an inevitable leap to the future of internet technology, the pressing question for telecom operators is how they can monetize the 5G opportunities.

5G mobile broadband is expected to become the key driver of revenue growth in consumer segment

Telecom operators will be primarily banking on 5G-enabled high-speed mobile broadband which is a natural progression from 4G mobile broadband internet services. An annual industry survey (2018), conducted by Telecom.com Intelligence – an information source for global telecom industry, indicated that 45% of the respondents (i.e. 1,500 telecom industry professionals across the world) recognized mobile broadband as the 5G service with greatest commercial potential. Based on 35,000 online interviews conducted with people across 22 countries in May 2019, Ericsson estimated that, with 5G, the average monthly mobile data consumption will increase 10 -14 times. Rising demand for data-intensive applications offering high quality video viewing and immersive gaming experience will be the key impetus for 5G mobile broadband.

5G to make dream of high-quality video streaming come true

Video accounts for the lion’s share of telecom operator’s network traffic today and it is likely to become the key driver of 5G mobile broadband service. Based on survey of 30 telecom operators across the world, Openwave Mobility (a mobile data traffic management solution provider) indicated that video on mobile broadband has registered average growth of 50%-60% year-on-year during 2014-2018. In many developing countries, this growth was over 100%. As per Ericsson’s estimates, video’s share in global mobile data traffic is forecasted to rise from 60% in 2018 to 74% in 2024, witnessing a 35% growth annually.

The growth in mobile video from 2010 to 2015 was attributed mainly to increased watch times. Interestingly, since 2015, growth in mobile video was mainly driven by consumer’s move towards high definition (HD) content. Further, video is expected to evolve from HD to higher display resolution such as 2k, 4K, and even 8K in the future. HD video consumes about 0.9GB per hour, while 2k and 4k would consume about 3GB and 7GB, respectively, thereby demanding higher bandwidth capacity and speed – which only 5G will be able to fulfil. This is because 5G is expected to be 100 times faster and have 1,000 times more capacity than 4G, thus enabling smooth streaming of 4k or 8k video without any buffering or lag. 5G will also become backbone for emerging technologies such as 360-degree video, virtual reality, and augmented reality.

5G will push for convergence of communications and media, opening up new avenues for telecom operators by integration of video content and media into their offerings. For instance, in May 2019, US-based telecom operator Verizon hinted that partnerships with content providers such as NFL, The New York Times, and YouTube TV, are part of the company’s 5G video strategy.

Anytime, anywhere gaming gets closer to reality with 5G

Just as 4G enabled video streaming services to go mainstream, 5G is expected to do the same for game streaming (also known as cloud gaming, meaning the game runs on a cloud platform instead of consumer’s devices). As per estimates of Newzoo, a gaming research company, the global gaming market is expected to reach US$152.1 billion in 2019, out of which 45% i.e. US$68.5 billion will be generated from mobile gaming (games on smartphones and tablets). This indicates that smartphones and tablets have already become most commonly used devices for gaming. 5G is expected to push mobile gaming to a next level by enabling game streaming. This is because 5G’s low latency (i.e. time taken to upload data from consumer’s device to target network) will allow consumers to stream games with virtually no lag. Currently, with 4G technology, the average latency is about 50 milliseconds (ms) because of which the response time between player-cloud server-player is too long. But latency could be reduced to 1ms with 5G, thus providing uninterrupted gaming experience to the players.

With advent of 5G, majority of the leading game developers, including Nvidia, Sony, Microsoft, EA, and Google, have already launched or plan to include game streaming as a part of their service offerings. The game streaming market is expected to grow at CAGR of 41.9% during 2019-2025, to reach US$740 million in 2025 from US$45 million in 2018. Telecom operators could tap into this growing demand for game streaming by partnering with game developers. For instance, in March 2019, Nvidia’s CEO indicated that the company will cash in on delivering game streaming service via telecom operators’ 5G offering and in return, telecom operators will get to keep more than half of the gaming subscription fee collected from the players (i.e. consumers). Such partnerships are already seen to be materializing; for instance, in September 2019, SK Telecom (South Korea’s largest telecom operator) paired up with Microsoft to deliver xCloud (Microsoft’s game streaming service) in South Korea over its 5G network.

5G Fixed Wireless Access (FWA) provides telecom operators with scope of market expansion

While 5G mobile broadband provides internet connectivity to smartphones, 5G FWA offers wireless broadband to homes and businesses through 5G networks. 5G FWA is expected to be a better alternative to fixed wired broadband including DSL (Digital Subscriber Line – internet delivered through existing copper telephone lines), cable (internet provided by cable operators through coaxial cables), and FTTH (Fibre-to-the-Home – the latest broadband technology using fibre optic cables). In January 2019, CEO of a US-based telecom operator AT&T emphasized that 5G FWA will evolve as a replacement product for existing fixed broadband over next three to five years.

5G FWA will be able to compete head on with fixed broadband. 5G FWA can provide faster speed and higher bandwidth, while also remaining more cost-effective compared to fixed wired broadband. To be specific, an article published in October 2018 on Inside Tower, an information source for wireless infrastructure industry, indicated that total capex per subscriber to deploy FTTH was about US$2,000-US$2,500, while 5G FWA capex could be estimated at US$1,000-US$1,500 per subscriber (representing nearly 50%-60% cost reduction over FTTH). Earlier, in August 2017, a Dubai-based research firm SNS Telecom estimated that 5G FWA can reduce the initial cost of installing last-mile connectivity by 40% when compared to FTTH.

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5G FWA is expected to become one of the first commercial use cases of 5G technology. SNS Telecom estimates 5G FWA revenues to reach US$1 billion globally by the end of 2019, and the market is forecast to grow at a CAGR of over 84% between 2019 and 2025, to reach US$40 billion in 2025. Another research firm MarketsandMarkets predicts that the global 5G FWA market will grow from US$396 million in 2019 to US$46,366 million by 2026, at a CAGR of 97.5% between 2019 and 2026.

Push for industry digitization by leveraging 5G-IoT technology opens up new market opportunities for telecom operators in business-to-business (B2B) segment

Digital transformation driven by 5G-enabled IoT applications is the key focus for most industries including automotive, healthcare, media and entertainment, retail, energy and utilities, manufacturing, agriculture, public transport, public safety, and financial services. Based on analysis of 400 digitization use cases from ten industries (mentioned above), Ericsson in association with Arthur D. Little (a management consultancy firm) released a report in October 2017 suggesting that the connectivity and infrastructure provisioning to enable industry digitization is expected to generate US$230 billion in 2026. Telecom operators, in their traditional role of operating network infrastructure, have the potential to address 89% of connectivity and infrastructure provisioning opportunity, representing US$204 billion in revenues. As per the Ericsson report, the telecom operators’ potential business from connectivity and infrastructure provisioning is anticipated from number of use cases including real-time automation, enhanced video services, monitoring and tracking, connected vehicle, hazard and maintenance sensing, smart surveillance, autonomous robotics, remote operations, and augmented reality, among others.

Further, many telecom operators are expected to evolve from being network developers to service enablers providing digital platforms catering to industry-specific digitization requirements. Service enablement to address industry digitization is forecast to generate US$646 in revenues in 2026, of which telecom-operator-addressable share is estimated at 52%, translating to US$337 billion.

Moreover, telecom operators also have the opportunity to take on the role of a service creator by developing new digital service and setting up new digital value systems. In this role, telecom operators have the potential to earn US$79 billion in 2026 (representing 18% of the total revenue generated through application and service provisioning).

Thus, if telecom operators partake in every step of industry digitization value chain by adapting the role of a network developer, service enabler, as well as service creator, the total addressable revenue opportunity from industry digitization could reach US$619 billion in 2026.

Monetizing 5G - The Road Ahead for Telecom Operators by EOS Intelligence

EOS Perspective

Traditionally, telecom operators’ business model revolved mainly around providing voice and data services to consumers. Advent of 5G will not only allow telecom operators to unlock new revenue streams in consumer side of business but also expand the addressable market to B2B space.

The onset of 5G will enable telecom operators to explore new use cases and develop corresponding service offerings. For this, telecom operators will need support and cooperation from different players across the ecosystem.

Telecom operators will need to collaborate with application developers, device manufacturers, as well as third-party technology solution providers to co-create services as per the requirement of specific industries. Ericsson research report (based on survey of 50 executives working with 37 telecom operators globally), released in 2017, pointed out that 77% of the respondents believed that third-party collaboration would be vital in monetizing 5G. Realizing the importance of industry collaboration to cultivate commercially viable 5G use cases, most of the leading telecom operators have started building their partnership network. For instance, Japanese telecom operator NTT Docomo indicated that total number of partners in its 5G Open Partner Program (launched in 2018) reached 2,700 by June 2019.

Further, telecom operators will need to modify and tailor their offerings to address the evolving consumer demands and expectations. To be successful, telecom operators will need to strive to develop and offer a complete solution to the consumers. For instance, 74% of the 35,000 respondents (that participated in Ericsson survey in May 2019), indicated that they find the idea of moving away from cable TV and shifting to 5G FWA bundled with 5G TV services very appealing. In view of this, most telecom operators are experimenting with bundling strategy, starting with inclusion of streaming services as a part of their package. Ovum estimates that streaming services (including, video, live sports, music, and game) billed through 5G network bundles offered by telecom operators will grow from US$6 million in 2019 to US$4.87 billion in 2024.

Moreover, telecom operators will need to develop completely new revenue models for enterprises. Telecom operators may adopt a business model widely used by consultants, wherein they can collaborate with enterprises for specific projects and receive a one-time fixed fee or share of project-associated profits or cost savings. Or, like application developers, telecom operators can develop standard solutions for specific industries and adapt licensing model permitting enterprises to integrate the solution into their end-product or subscription-based model allowing the enterprises to use the solution for a specific period of time.

5G’s functionalities and characteristics entice telecom operators to develop new use cases and capitalize on corresponding revenue opportunities. However, the use cases, particularly in enterprise segment, still need to stand the test of practicality and commercial viability. Though 5G offers plethora of opportunities for the telecom operators, it is advisable to focus on a few business cases that best fit to their capabilities and develop the ecosystem (including application developers, device manufacturers, and third-party solution providers) required to take the final solution to prospective consumers.

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Decoding the USA-China 5G War

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The USA perceives Huawei, world’s largest telecom network equipment supplier and second largest smartphone manufacturer, as a potential threat capable of using its telecom products for hacking and cyber attacks. The US government suspects that China could exploit Huawei for cyber espionage against the USA and other countries. Amidst national security concerns, the US government has called for global boycott of Huawei, including of its 5G product range. The USA’s efforts to clamp down Huawei have rippling effect across the 5G ecosystem.

The USA and China have been trading rivals since 2012, particularly on the technology grounds. This resulted in a ban on China-based telecom equipment provider Huawei preventing it from trading with the US firms, over the accusation of espionage of critical information to the Chinese government. As a result, Huawei was barred from selling any type of equipment to be used in the US communication networks. This ban pertained to the 5G network equipment as well, and thus, Huawei’s 5G network equipment was ruled out from deployment in all parts of the USA. Few other countries, which agreed with the USA’s accusations on Huawei, also imposed a ban on the company’s 5G network equipment. The move severely affected Huawei’s exposure to some of the potential 5G markets, but it came as sigh of relief for its global competitors wary of Huawei’s growing dominance in 5G space.

Further, on May 16, 2019, the US government decided to put Huawei on the Security Entity List which restricted the company from buying any US-based technology (key hardware and software) for their 5G network equipment without approval and license from the US government, thus aggravating the 5G war. This not only brought new set of challenges for Huawei, but also created a rough path for the USA’s own technology firms involved in supplying components to Huawei. Considering impact on the US technology firms having Huawei as a key customer, on June 29, 2019, the US government announced relaxation on the Huawei ban, thereby allowing these US firms to continue their supply to Huawei for a 90-day period which got over in mid-August. The relaxation period was further extended till November 18, 2019, giving temporary relief to Huawei and its US-based business partners.

Huawei bears the brunt of USA-China 5G clash

The USA has initiated a global campaign to block Huawei from next-generation wireless communication technology over security concerns and it is pressuring other countries to keep out Huawei from 5G rollout. This invited quite a few repercussions for the company. One of the major and obvious consequences involved a major loss of potential market opportunity in the US territory as well as in other countries which are under strong influence of the USA.

After prolonged persuasion by the US government, in July 2018, Australia banned Huawei from 5G rollout in its territory. Japan also joined the league in December 2018 by imposing a ban on Huawei’s network equipment for 5G deployment, amid the security concerns to avoid hacks and intelligence leaks. Further, New Zealand and Taiwan also followed the suit in shutting out Huawei from 5G deployment.

In June 2019, the founder and CEO of Huawei, Ren Zhengfei, indicated that the company is likely to experience a drop in its revenue by US$30 billion over the next two years, which can be seen as a knock-on effect of growing US sanctions on Huawei. Also, Huawei expects its smartphone shipments to decline by 40% to 60% by the end of 2019 as compared to the total shipments in the previous year.

Despite repeated warnings from the USA, some countries have come out in support of Huawei by rejecting the USA’s claims. The regulatory bodies of countries such as Russia, Germany, Brazil, South Korea, Finland, and Switzerland have taken their decisions in favor of Huawei and allowed the company to deploy its 5G network equipment in their territories, affirming that they do not see any technical grounds to ban the company from their telecom networks.

Moreover, the US government has been persistently urging many European countries, especially the UK, to join its decision of barring 5G trade with Huawei. In March 2019, the EU recommended its member countries not to impose outright ban on Huawei, but instead assess and evaluate the risks involved in using the company’s 5G network equipment. Already earlier, in February 2019, the UK government concluded that any risks from the use of Huawei equipment in its 5G network can be mitigated through certain improvements and checks which the company will be asked to make and hence the decision of completely banning the company’s equipment from UK’s 5G network was not taken.

Among Asian countries, India, the second-largest telecom market in the region, has not decided whether to allow Huawei to sell its 5G network equipment in the country. China has warned the Indian government that the repercussions of banning Huawei equipment would include challenges in catering to the demand for low-priced 5G devices, thus causing a hindrance in rapid development of India’s telecom sector. In June 2019, the Department of Technology of India indicated that, since the matter of Huawei concerns the security of the country, they will scrutinize the company’s 5G equipment for presence of any spyware components. India will see how other countries are dealing with the potential security risks before giving a green light to the company.

The USA’s allegations against Huawei have made all the countries cautious over dealing with the company. Despite having proven technological supremacy in 5G network equipment market, Huawei has come under strong scrutiny for its 5G network equipment across the globe.

Huawei ban: Boon for some, bane for others

Huawei’s troubles are turning into major opportunity for its competitors in the 5G network equipment and smartphones market space. However, suppliers to Huawei, particularly US-based companies providing hardware and software for 5G devices and network equipment, took a hard hit as they lost one of their key customers because of the trade ban.

Huawei ban presents increased opportunities for its global competitors in 5G network equipment market

Major competitors of Huawei in 5G network equipment manufacturing business – Samsung (South Korea), Nokia (Finland), and Ericsson (Sweden) – are positioned to get the inadvertent benefit of expanded market opportunities with one competitor less. With Huawei losing potential market in countries where it is facing backlash, its competitors managed to grab a few contracts.

For instance, in March 2019, Denmark’s leading telecom operator TDC, which had worked with Huawei since 2013, chose Ericsson for the 5G rollout. Further, in May 2019, Softbank Group Corp’s Japanese telecom unit, which had partnered with Huawei for 4G networks deployment in the past, replaced Huawei with Nokia for its end-to-end 5G solutions including 5G RAN (i.e. radio access network equipment including base stations and antennas which establish connection between individual smart devices and other parts of the network). In the USA, Samsung is gaining significant traction as it has started supplying 5G network equipment to some of the leading US telecom operators including AT&T, Verizon, and Sprint.

A report released in May 2019 by Dell’Oro (a market research firm specializing in telecom) indicated that Samsung surpassed Huawei for the first time by acquiring 37% of the share of total 5G RAN revenue in the first quarter of 2019. In the same period, Huawei stood second with 28% share, followed by Ericsson and Nokia with 27% and 8% share, respectively. Earlier, Huawei led the 5G RAN market in 2018, accounting for 31% share of total 5G RAN revenue that year. Huawei was followed by Ericsson, Nokia, ZTE (China), and Samsung with 29.2%, 23.3%, 7.4%, and 6.6% share, respectively. Due to widespread skepticism about Huawei over espionage accusations, a shift in 5G network equipment market can be expected by the end of 2019, since competitors are likely to gain more growth momentum over Huawei.

Demand for Samsung smartphones gets a boost as Google blocks Android support to Huawei

In the smartphones sector, Samsung, which is the world’s largest smartphones manufacturer, may turn out to be the winner in the Huawei ban situation. Huawei, through its low-priced Android smartphones with features similar to Samsung’s smartphones, is emerging as the largest rival of Samsung in the smartphone market.

As per IDC data, Samsung’s market share (by total smartphone shipments volume) declined from 21.7% in 2017 to 20.8% in 2018, whereas Huawei recorded 33.6% year-on-year growth as market share increased from 10.5% in 2017 to 14.7% in 2018. But since Huawei was placed on US trade blacklist, Samsung is likely to benefit from the situation because of the broken deal between Google and Huawei which led Huawei to lose access to Google’s Android operating system (OS) for its next-generation 5G smartphones.

While Google managed to get a temporary license to continue to provide update and support for existing Huawei smartphones, it prevented Google from providing Android support for Huawei’s new products including soon to be released 5G smartphones. Huawei indicated that its latest 5G smartphones Mate 30 series, which will be launched on September 19, 2019, will run on open-source version of Android 10 and it will not have any of the flagship Google apps such as Google Maps, Google Drive, Google Assistant, etc.

Huawei unveiled its own operating system named HarmonyOS on August 9, 2019, but it still seeks support of Google’s Android OS for its upcoming 5G smartphones along with access to widely popular apps such as Facebook and WhatsApp which all belong to American firms. Android OS, controlling over three-fourths of the mobile OS market as of August 2019, is widely adopted by both the app developers as well as the users. As of second quarter of 2019, Android allowed its users to choose from 2.46 million apps. Encouraging app developers to rewrite their apps as per platform-specific requirements of a new OS with low user base is challenging. Conversely, consumers prefer OS which allows them to use all the apps they like. If HarmanyOS needs to be used as Android replacement, Huawei will need considerable time and financial resources to work with app developers to add similar apps to Huawei’s HarmonyOS.

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The future scenario for global 5G smartphones market will depend on the pending decision of the US government over allowing US technology firms to trade with Huawei. If the US government allows the trade, Huawei will have high chances of leading in the 5G smartphones sector owing to its competitive pricing and innovative solutions. On the other hand, if the ban still persists in future, the market of Huawei’s global competitors, Samsung in particular, is likely to swell, owing to their trusted brand name and reliability along with the support of Android OS.

US-based hardware suppliers for telecom devices face revenue loss as they lose their key customer, Huawei

The US government’s executive order issued in May 2019 blocking US exports to Huawei led to adverse effect on the revenue of the US-based companies that used to supply key hardware to Huawei for its 5G network equipment and devices.

For example, Qualcomm which was one of the largest sellers of modem chips, mobile processors, and licenses for 3G, 4G, as well as 5G technology in the Chinese market, has experienced a decline in revenue by 13% year-on-year in the third quarter of 2019 along with decline of approximately 36% in shipments of chipsets and processors. Similarly, Broadcom, which supplies switching chips used in network equipment, is also facing challenges with loss of its highest revenue-generating customer, Huawei, accounting for US$900 million of company’s revenue in 2018. Considering the Huawei blacklisting’s impact on financial results in the first two quarters of 2019, Broadcom has even cut its revenue outlook of the fiscal year 2019 from US$24.5 billion to US$22.5 billion.

In view of financial implications of Huawei blacklisting on the businesses of US-based technology firms, the US government, in June 2019, reprieved the trade ban on Huawei till November 18, 2019. Post the relaxation period, the US government may again ban Huawei from doing business with US technology firms. In case the US government puts the ban in effect owing to the security concerns, the repercussions are likely to deepen further for the US firms over losing considerable revenue coming from China’s telecom hardware industry.

Ban on Huawei means telecom operators will have to pay a higher price for 5G network equipment

Huawei ban is also seen to be impacting the US telecom operators as they face a particular challenge of increasing outlay to build the 5G networks. This is because the 5G network equipment provided by Nokia and Ericsson is more expensive than Huawei’s. In March 2019, Huawei claimed that allowing the company to compete in the telecom market in North America would reduce the total cost of wireless communication infrastructure development in the region by 15%-40% and provide an opportunity for telecom operators to save US$20 billion over the next four years.

The cost factor has also made some European countries sway their decision in favor of Huawei. In June 2019, GSMA, an industry association with over 750 telecom operators as members, indicated that shunning Chinese equipment from 5G network deployment in Europe would add EUR 55 billion (~US$61 billion) to the costs of telecom operators and will also cause the delay of about 18 months in 5G network deployment. In fact, to avoid such repercussions, many European countries have already decided to continue buying telecom equipment (including 5G network equipment) from Huawei and other Chinese firms, Greece being the latest one to join the group of countries including Switzerland, Finland, Sweden, and few more.

India, which is a huge market for low-priced smartphones and telecom network equipment, still remains undecided on the proposed ban on Huawei. The 5G network equipment supplied by Nokia and Ericsson in India is expected to be 10%-15% more expensive as compared to Huawei’s. Also, Huawei claims that imposing a ban on the company will push back 5G deployment in India by two to three years. Moreover, the prolonged decision-taking has also affected the 5G network deployment timeline of the country and thus slowing down the overall development of its telecom industry. Dilemma whether to work with Huawei is seen to have wide-reaching implications on overall development of 5G technology in some countries.

Decoding USA-China 5G War - EOS Intelligence

EOS Perspective

The USA-China 5G war has taken many unpredictable turns over the last year, resulting in adverse implications for Huawei and its US-based business partners. The current status of the 5G war indicates a relaxation over the Huawei ban till November 18, 2019. This allows the US companies to continue supply of their technology products including key software and hardware required by Huawei for 5G equipment manufacturing. However, the relaxation of the ban is not intended to remove Huawei from the US Department of Commerce’s Entity List and the US companies still have to apply for temporary license for exporting products to Huawei.

The USA has been targeting Huawei since 2012, and there seems to be no stopping. Considering the implications of the US sanctions, Huawei has been making notable efforts to end the ongoing discord with the US government. Huawei has always denied all the accusations and maintained that the company is willing to work with the US government to alleviate their concerns over cybersecurity. In May 2019, Huawei proposed implementation of risk mitigation programs to address potential security threats. To further appease the US government, on September 10, 2019, Huawei proposed selling its 5G technology (including licenses, codes, technical blueprints, patents, as well as production know-how) to an American firm. This is seen as one of the boldest peace-offering deals by Huawei to win back the trust of the US government. Huawei claimed that the buyer will be allowed to alter the software code and thereby eliminate any potential security threats.

Currently, there is no US company manufacturing 5G network equipment. Acceptance of Huawei’s proposal would enable the USA to gain footing in the 5G network equipment market and mitigate the fears over rising dominance of Huawei in global 5G space. While the move risks to create a competitor for Huawei in the 5G network equipment market, the company could also use this as an opportunity to evolve from core manufacturing business to providing technical expertise to other companies for manufacturing 5G equipment. The proposal is still subject to approval from the USA and Chinese governments.

While Huawei is ramping up its efforts to break the deadlock with the US government, at the same time, the company is also devising a parallel strategy presuming the worst possible outcome of USA-China trade tensions over 5G, i.e. the USA eventually cutting off ties with Huawei. The company is working towards a contingency plan with an ambition to take control of its supply chain and reduce its dependency on the US technologies and supplies.

One of the major actions of its plan B includes developing its own operating system HarmonyOS as a substitute to Google’s Android OS. While Huawei wants to continue with Android OS for its future 5G smartphones, in case the US government blocks Huawei’s access to Google’s services, Huawei will have to switch to own HarmonyOS.

China, Huawei’s home market, is more receptive to the company’s products, and switching to own operating system is expected to work in favor of the company. In July 2019, Canalys, a Singapore-based technology market research firm, estimated that China would account for over one-third of 5G smartphones globally by 2023. Huawei could use this opportunity to develop its proprietary OS based on the learnings in China before expanding globally to compete with more established and mature OS such as Android OS and iOS (which respectively controlled 76.23% and 22.17% of the smartphone OS market as of August 2019).

On the other hand, in anticipation of loss of partnerships with key suppliers such as Qualcomm and Broadcom, Huawei had stockpiled critical components between May 2018 and May 2019, according to a research report by Canalys. This move was aimed at ensuring the continuity of production of 5G products that rely on core technology from US-based firms for three to twelve months.

Further, Huawei has been developing proprietary chipsets for its 5G smartphones and networking products, which are being considered as alternatives for products offered by Qualcomm and Broadcom. On September 6, 2019, Huawei launched Kirin 990, a new 5G processor for smart devices, which will power Huawei’s upcoming 5G smartphone including Mate 30 series. Further, in January 2019, Huawei launched a 5G multi-mode chipset, Balong 5000 that supports a broad range of 5G products including smartphones, home broadband devices, vehicle-mounted devices, and 5G modules. The company claims this chipset to be the first to perform to industry benchmark for peak 5G download speeds.

Seeing such developments at the Huawei’s end, it is clear that the company is striving hard to remain on the top of 5G network equipment and device manufacturing sector. The USA’s efforts to derail Huawei from its path to dominance in 5G are certainly going to impact the overall growth of the company in short term, but, with its plan B, things are expected to smooth out for Huawei in future. Even if Huawei is not be able to retain its current global leading position in 5G network equipment and device manufacturing, it will certainly remain one of the strong contenders. The US sanctions are further encouraging Huawei to evolve as an all-round player in the 5G ecosystem.

On the contrary, the USA’s aggression against Huawei is expected to hit its own technology industry in the long term. For instance, the blacklisting of Huawei will not only cost the US technology firms to lose one of its largest customers, but will also result in intensified competition as Huawei ramps up its in-house capabilities to fulfill the demand of the entire 5G ecosystem. An example of this could be Huawei’s announcement in April 2019 that the company was open to selling the 5G chips to rival smartphone companies, including Apple. Moreover, if Huawei’s HarmonyOS is able to succeed in gaining significant user base, it would challenge the dominance of Android and iOS. Hence, it would be in best interest of the USA and its technology industry, if the country could take a different approach and try to control and minimize security risks related to Huawei’s engagements, rather than placing an outright ban on the company. Similar to what Germany did in December 2018, the USA could encourage telecom operators to establish verification centers and hire third-party experts to identify and resolve vulnerabilities in Huawei’s 5G network equipment and devices.

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